The Disappearing Declarant
More and more associations these days are experiencing the “disappearing declarant” phenomenon: The original developer suffers such financial difficulties that their unsold units are abandoned or foreclosed upon – or the declarant itself files bankruptcy or goes into receivership. Sometimes the construction stops mid-stream, leaving partially developed lots unfinished and buildings unoccupied. Clearly these associations are experiencing some down times at the very early stages of their existence. But associations should know that even under these circumstances, down is not out. Associations can take advantage of the shared goals of its members to preserve and increase their property values through the various situations discussed below.
A declarant who disappears prior to turnover of the association to the homeowners affects the Association’s very ability to govern. For example, if three of the five board members are to be appointed by the declarant and only two elected, it is unlike that the board can meet its 50% quorum requirement if declarant board members have not been appointed or do not attend board meetings. Without a quorum, the board cannot act on behalf of the association. Once those units are sold or taken over by the bank, however, the Association should be able to elect all board members.
If the declarant has truly disappeared as opposed to just being inactive, the remedy in this situation is to initiate a lawsuit similar to those brought by shareholders of other corporations to ask a court to ask to have a receiver appointed to run the association. In that situation, the receiver has the power to govern the association in the best interest of the association and is not necessarily bound by all terms of the governing documents.
Units in Limbo
If the declarant’s units have been foreclosed by the bank, the bank is responsible for assessments just as any owner would be. However, the more common situation is where the bank has the right to foreclose (the declarant is in default of the loan obligation), but the bank does NOT foreclose, knowing that it then becomes responsible for paying assessments. In this case, where there are a substantial number of units in that situation and where the units are delinquent in paying assessments, the association may want to pursue foreclosure of the units.
Initiating foreclosure is not without its expense and pitfalls, however. While it is possible that the bank will step in and . . .
pay the delinquent assessments, it could just intervene in the foreclosure and assert its priority over the Association’s assessment lien, leaving the already financially distressed association with the cost of initiating the foreclosures. On the other hand, if the association is successful in initiating foreclosure proceedings, it may have a receiver appointed to take possession of the units and rent them in order to have a tenant paying the assessments (paying attention to any rental restrictions in its governing documents). Moreover, a recent court of appeals case suggests that an association may be able to take advantage of the bank’s failure to respond to the lawsuit and extinguish the bank’s mortgage lien.
Foreclosed Units sold by Trustees
As mentioned above, if the bank has foreclosed upon declarant-owned units, it will owe the assessments. But it is far more common that the bank enlists a trustee to sell the units upon default. In many cases, the new owner is an investor seeking to take advantage of the low trustee’s sale price. These new owners may believe that the bank will pay off all delinquent assessments associated with the property. Remember that for condos, the association can only collected upon its 6-month “superpriority” for delinquent regular assessments upon foreclosure. See RCW 64.34.364(3). In other words, regardless of how much is owed on the unit, the association will only be able to collect six months’ regular assessments from the new buyer. It used to be that title companies would request a statement of the six month delinquency to pay off at the time of closing. This is certainly what most investors either bargain for or assume. However, it has become more and more common that the superpriority lien is not paid off at the time of the sale, leaving the new owner to pay the delinquency. When the association rightfully pursues the new owner for the past delinquency, it can often result in “bad blood” between the new owner and the association even though the new owner’s anger is clearly misdirected. Good communication between the association and the new owner is essential to keeping these relationships positive. Association counsel can assist in explaining to investor owners why any past delinquencies are owed despite the foreclosure. Moreover, associations may want to consider allowing the new owner to pay the superpriority amounts over time.
Investors Buying up Blocks of Units
Often, sale of blocks of units to investors are sought by either the declarant or its receiver or bank. But ownership of blocks of units by investors comes with its own problems. For example, under FHA and Fannie Mae guidelines, a single investor cannot own greater than 10 percent of the total number of units in a condominium. If this number is exceeded, owners may not qualify for mortgages backed by these companies.
In addition, investors who own a high percentage of units may be able to control the association and have it act in the investor’s interest rather than interest of the association as a whole. Through block voting, the investor may be able to control who sits on the board, could essentially exercise veto power over budgets and initiate or even complete amendments of the governing documents. Often, the only remedy for association where a single investor or group of investors own a majority or supermajority of the units is to bring an action for receivership, but it often takes a very organized minority with sufficient assets to bring such claims.
If a condominium association with an absent declarant suspects construction defects, the association may think it has no recourse – after all, the declarant has filed bankruptcy or dissolved or simply no longer exists, right? Wrong. The original declarant may have an asset worth pursuing that is not part ofthe bankruptcy – insurance. While we all know that insurance coverage for construction defects is no longer a given, associations in this situation should not give up hope. Even if principles or owners of the declarant cannot be found, an association may be able to pursue the insurance assets.
Remember also that if a company has purchased more than six units or 50% of the units in the condominium, that company will be treated as a “dealer” under the Condo Act and may also have responsibility under the Act to disclose known problems. If the dealer constructed or completed construction of units, it may also have liability for construction defects as a declarant because it exercised declarant-type rights.
An association with an absent declarant is not without remedies, but becoming a successful association under these circumstances often requires community-minded investors, a proactive board or a very organized minority group of homeowners. Focusing upon the shared goal of preserving and increasing property values may help various members of an association come together to reach these goals.